China now permits foreign asset management firms to convert their PFM licence to a mutual fund licence, according to an unconfirmed report in the mainland publication Securities Times.
A mutual fund licence would permit them to sell to the domestic retail investor base, opening up a potential $2trn (RMB 13.9trn) opportunity, going by data from the Asset Management Association of China.
Six asset managers including Blackrock, Vanguard, Fidelity, Van Eck, Neuberger Berman and Schroders are intending to apply for fully foreign-owned mutual fund licenses, according to a report from Bloomberg.
However, the Securities Times report said a firm needs registered capital of RMB 400m ($56.8m) and only Fidelity and Vanguard can meet the requirement.
FSA contacted Value Partners and Vanguard but they declined to comment. UBS Asset Management, Blackrock were also contacted, but were not available for comments.
Brand and distribution
“Whether other fund houses will follow the six, that will depend on their respective strategies,” Rachel Wang, director of manager research in China at Morningstar told FSA.
“If they want to enter the Chinese market, from the perspective of investment management capabilities, they need to have fund managers who can invest in A-shares well and this is the most critical factor for good performance,” she added.
Wang also noted that the firms “are actually better at investing overseas and investing globally”, but a fund group with a Hong Kong office and existing A-share funds would be better positioned, she said, adding that a solid A-share research team is essential.
She gave the example of Schroders, which has several A-share funds in Hong Kong. The managers invest in the mainland Chinese market through Shanghai-Hong Kong Stock Connect or QFII (qualified foreign institutional investor) quota.
“Distribution channels will be a challenge,” Wang added.
To effectively sell to China’s retail investors, the asset managers will need to engage with large players such as Ant Financial, Tiantian Fund website, and major banks such as China Merchants Bank, she said.
Major domestic banks have their own requirements in terms of distribution channels. Foreign firms will “need to show historical performance, especially the performance of investing in A-shares, as well as the scale”.
PFM products for sale to domestic professional investors, have been slow to gather assets. According to the Securities Times report, there are about 50 PFM products, with a total AUM of about RMB 6bn, and the average size of each product is only around RMB 100m ($14m), which is tiny compared to their parent group AUM.
Nonetheless, the new move, if confirmed, would be evidence of China’s continuous opening of its financial industry. In October, regulators officially announced that the investment limitation for foreign fund management firms having a joint venture stake in Chinese retail mutual fund companies would be officially lifted on 1 April 2020.
